Politicians fear creating tax reform losers: Henry

Policymakers too often rush to over-compensate people when putting forward tax reform plans out of fear of creating "losers", former Treasury boss Ken Henry says.

Speaking at a public policy forum in Canberra, Dr Henry said it had become almost normal practice for politicians to effectively "bribe" voters to get support for controversial tax changes.

He said the former Howard government did it with the GST, and the current Government is using a similar message to try to win support for its carbon tax.

"This idea that in order to get political acceptance of any tax change you have to bribe people through over-compensation - this is a very strong idea in Australian politics," he said.

In explaining its carbon tax package, the Government has said that around 8 million households will get some assistance, with more than half of those expected to be better off - even with the higher costs associated with pricing carbon.

Dr Henry, who authored the 2010 Future Tax System report, said part of the reason tax reform is so difficult is because the public has the wrong idea of how it should work.

"It is curious that in Australia, when you ask people what they mean by tax reform, if you dig down they think reform means tax cuts," he said.

"Yet... it is more likely that over time, tax revenue will have to be expanded in order to meet the future needs of government - in part because of the ageing of the population."

He said the issue was compounded because of the difficulties involved in staging a national debate on tax reform.

"It is almost impossible in Australia - perhaps because of the way politics works, perhaps because of the way media works, perhaps because of the way they work together - very difficult to have a debate about concepts."

"It's rather easier to have a debate about politics," he said.

GST debate

The 2010 review of the tax system put forward a number of recommendations but was prevented from suggesting any increase to the rate of the GST or its coverage because of the Government's policy not to make any change to the 10 per cent charge.

The Coalition has also ruled out making changes to the GST.

Despite its limiting terms of reference, the report noted the GST was not as efficient as it could be because it did not tax consumption on a truly comprehensive basis.

Dr Henry said there needed to be more public debate about how the GST works and whether it should be changed to raised more revenue.

"If we think about the challenges to the revenue base over the years ahead - even if we don't for whatever reason feel comfortable with relying more and more on consumption tax bases for more and more revenue - we're going to have to," he said.

He said that because of the difficulty involved in tax reform, governments often end up applying taxes to things that people find easiest to avoid instead of those things that are more difficult to avoid, resulting in a tax system that is complex and "very inefficient".